Labor price variances usually result from two factors: (1) paying workers different wages than expected, and (2) misallocation of workers. In companies where pay rates are determined by union contracts, labor price variances should be infrequent. When workers are not unionized, there is a much higher likelihood of such variances. The responsibility for these variances rests with the manager who authorized the wage change.
Misallocation of the workforce refers to using skilled workers in place of unskilled workers and vice versa. The use of an inexperienced worker instead of an experienced one will result in a favorable price variance because of the lower pay rate of the unskilled worker. An unfavorable price variance would result if a skilled worker were substituted for an inexperienced one. The production department generally is responsible for labor price variances resulting from misallocation of the workforce.
Labor quantity variances relate to the efficiency of workers. The cause of a quantity variance generally can be traced to the production department. The causes of an unfavorable variance may be poor training, worker fatigue, faulty machinery, or carelessness. These causes are the responsibility of the production department. However, if the excess time is due to inferior materials, the responsibility falls outside the production department.
MANUFACTURING OVERHEAD VARIANCES
The total overhead variance is the difference between the actual overhead costs and overhead costs applied based on standard hours allowed for the amount of goods produced. As indicated in Illustration 23-8 (page 1125), Xonic incurred overhead costs of $10,900 to produce 1,000 gallons of Xonic Tonic in June. The computation of the actual overhead is comprised of a variable and a fixed component. Illustration 23-24 (page 1132) shows this computation.
|Variable overhead||$ 6,500|
|Total actual overhead||$10,900|
ILLUSTRATION 23-24 Actual overhead costs
To find the total overhead variance in a standard costing system, we determine the overhead costs applied based on standard hours allowed. Standard hours allowed are the hours that should have been worked for the units produced. Overhead costs for Xonic Tonic are applied based on direct labor hours. Because it takes two hours of direct labor to produce one gallon of Xonic Tonic, for the 1,000‐gallon Xonic Tonic order, the standard hours allowed are 2,000 hours (1,000 gallons×2 hours)2,000 hours (1,000 gallons×2 hours). We then apply the predetermined overhead rate to the 2,000 standard hours allowed.
Recall from Illustration 23-6 (page 1124) that the amount of budgeted overhead costs at normal capacity of $132,000 was divided by normal capacity of 26,400 direct labor hours, to arrive at a predetermined overhead rate of $5 ($132,000÷26,400)$5 ($132,000÷26,400). The predetermined rate of $5 is then multiplied by the 2,000 standard hours allowed, to determine the overhead costs applied.
Illustration 23-25 shows the formula for the total overhead variance and the calculation for Xonic for the month of June.